Nuvo Pharmaceuticals - $MRV.to
A little while ago I tweeted out this asking for some input on $MRV.to. Thanks to those who replied. I share a similar sentiment as most of the responses.
This one has lots of hair so be warned.
Share Price: $1.33
Shares: 11.4 million
Market Cap: 15.2 million CAD
EV: 81 million
Here is a chart since they closed the Aralez deal.
Background
Miravo is a publicly traded, Canadian healthcare company with global reach and a diversified portfolio of prescription and non-prescription products.
Miravo’s head office is located in Mississauga, Ontario, Canada, its international operations are headquartered in Dublin, Ireland and its manufacturing facility is located in Varennes, Québec, Canada. The Varennes facility operates in a Good Manufacturing Practices (GMP) environment respecting the U.S., Canada and E.U. GMP regulations and is regularly inspected by Health Canada and the U.S. Food and Drug Administration (FDA).
As at September 30, 2021, the Company employed a total of 101 full-time employees across its manufacturing facility in Varennes, Québec, corporate office, Commercial Business in Mississauga, Ontario and international headquarters in Dublin, Ireland.
The company has 3 distinct business segments.
1) Commercial Products - Products Commercialized by Miravo in Canada
This includes growth products like Blexten, Cambia, Suvexx and NeoVisc. Cambia, Blexten and Suvexx generated $8.8 mil CAD in Q4 2021. They also have some mature products in segment.
2) License and Royalty - International Sales
This includes Vimovo, Resultz, Yosprala, Pennsaid and Suvexx. This segment had $2.7 mil CAD in Q4 2021. Results can be lumpy with milestone and up-front payments being made to MRV from lisencing agreements.
3) Production and Services
Revenue from products manufactured by Miravo at it’s facility in Quebec. This segment generated $3.2 mil CAD in Q4 2021. They have indicated that the facility still has capacity if needed.
Aralez Purchase
Up until 2019 Nuvo was focused on drug development. That changed when they purchased the Aralez's Canadian business with some additional rights on December 2018.
Nuvo acquired Aralez's Canadian specialty-pharmaceutical business, which was formerly known as Tribute Pharmaceuticals Canada Inc. (Tribute). This includes Cambia®, BlextenTM, SuvexxTM (sold as Treximet® in the U.S.), as well as the Canadian distribution rights to Resultz,® and would create a platform for Nuvo to acquire and launch additional commercial products in Canada. The Transaction would also include the worldwide rights and royalties from licensees for Vimovo®, Yosprala® and global, ex-U.S. product rights to MT400 (to be sold as Suvexx in Canada once registered and currently commercialized in the U.S. as Treximet).
They financed the deal with loans from Deerfield, more on that later.
Deal Financing
The total cost was $110 million US. Here’s the Deerfield debt structure.
The funding arrangements with Deerfield include a 6-year, 3.5% p.a. interest amortizing loan in the principal amount of US$60 million, an 18-month 12.5% p.a. bridge loan in the principal amount of US$6.0 million, the issuance by Nuvo to Deerfield of 6-year, 3.5% p.a. interest, senior secured convertible notes in the principal amount of US$52.5 million, initially convertible into 19,444,444 common shares of the Company at a conversion price of US$2.70 (the Notes) and approximately 25,555,556 million common share purchase warrants, each such warrant initially exercisable for one common share of the Company for a period of six years from the date of issuance at an exercise price of $3.53 per share (the Warrants).
There are 3 methods of Warrant Settlement
The first method of settlement requires the holder to remit the exercise price of $3.53 per Warrant and the Company will issue a common share of the Company.
The second method results in the $3.53 per Warrant strike price being applied as a payment against the principal balance of the Amortization Loan outstanding.
The third method of exercise applies to those Warrants classified as Flexible Exercise Shares (FES). Warrants considered FES can be exercised without upfront remuneration to the Company. Instead, the Company issues fractional shares equal to the difference between the current share price and the $3.53 exercise price of the Warrant.
There is a minimum payments of $2.5 mil USD on the amortization loan, plus a 50% excess free cash flow sweep.
In H1 2019 the company lost protection from generic competition for one of the larger drugs in the acquisition (Vimovo). A generic version was launched in Q1 ?. Deerfield agreed to defer some debt payments as this wasn’t expected when the Aralez deal was financed.
Run rate business
The company has done an average of 6.4 mil in EBITDA over the last 10 quarters. This tracks gross CFFO fairly closely. TTM the company has produced 21 mil and 16 mil in EBITDA and CFFO. There is quite a bit of noise on the income statement fwiw.
I believe this TTM run rate can be sustained (and likely improved upon) with the current portfolio. Here are a few reasons why:
A pediatric version of Blexten has been launched and hasn’t hit the financials yet
Suvexx was launched during the pandemic and may grow at a higher rate with reopen
Partnered with SK Chemicals to launch Suvexx in South Korea
expected commercial launch Q1 2023
Partnered with Orion to launch Suvexx in Nordics and some other countries
expected commercial launch Q1 2023
Drugs coming off exclusivity
Here is the hardest part for me to model out. Blexten, Cambia, and Suvexx all come off exclusivity in Canada in 2023-26. This is the driving force of the business and these profits will need to be replaced. They will move into the mature category and MRV will still generate cash from these products, but unsure as to how much.
Management & Board
The management team is seasoned in the specialty pharma space. The compensation is reasonable for the space. The board does have 3 private investors on it and owns 5% of the common. I’m not sure how to judge the board from my vantage point. The debt taken on looks poor in hindsight, but MRV has also had their challenges to navigate.
There is about 1% of the outstanding owned by management.
A couple of funds own a fair bit of the shares. Red Oak owns 15% and Polar Asset Management owns 9%.
Share Structure
11.4 million common
1.5 million options at average strike of $3.17
Amortization loan
3.5% interest rate
40.6 million in principal
minimum 2.5 mil USD payment plus 50% of fcf sweep
25.6 million warrants at $3.53 CAD
12.3 million are considered flexible
expires Dec 31, 2024
I’m expecting this loan to be paid off before the term expires
Convertible loan
3.5% interest rate
not pre-payable
convertible at $2.70 USD (about $3.40 CAD)
total debt of 95.7 mil at end of Q4 2021
cash of 30.8 mil at end of Q4 2021
net debt of about 65 mil
Deerfield owns the amortization loan and the convertible loan although there is a clause that prevents them from owning 4.95% of the common
Risks/Uncertainties
the existing products could lose marketshare
expected launch of Suvexx internationally could be delayed or cancelled
cash could be spent on a poor acquisition
they could strike some sort of a deal with Deerfield to clean up the balance sheet that could be dilutive to current shareholders
How(if) I Win
I see a few things that need to happen for me to make money on this.
The balance sheet needs to be cleaned up at some point. Whether that’s just by generating cash or something different (like Deerfield debt being extended or something), it is an overhang on the stock.
Profits from the big 3 products need to be replaced with M&A of other commercial products or with more international licensing.
This may be part of point 1, but the Deerfield overhang needs to be removed.
I think if the first 2 are executed then the stock rerates higher. If all 3 happen then we should be looking at a pretty big move. Right now the conversion and warrant overhang are not a worry. The business needs to be executing and new deals need to be signed. If we get to a point were the warrants and convertible loan are a concern the share price is higher (almost a double from today) or this has been dead money for quite some time. Either way, I will know if my analysis was right. I think the cash sweep clause is helpful and I probably wouldn’t put capital into something so debt heavy without it.
This is a starter position for me. I will add if some milestones are met and the story derisks. They are trading less than 1x expected EBITDA for 2022, so I think the upside is there but unsure how to handicap the risks. I’ll keep the position small for now.
Anyone else follow MRV?
Dean
*long MRV.to at time of writing.